The battle lines for the next election appear to have been drawn around tax cuts – specifically, who deserves to get them and who doesn’t. Separating the politics from the economics is not always easy.
In this article, we ask “What will these proposed policies mean for property investors?”.
All property investors want to see their portfolio values rise over time, so before you cast your ballot papers, there are three main areas you need to consider when the next election is called.
> Negative Gearing (NG) and Capital Gains Tax (CGT) Discounts
This is probably the easiest place to differentiate the two parties’ policies. The current federal coalition government proposes to retain the current taxation legislation around NG and CGT, whereas the opposition has laid out its plans to abolish NG on all but new properties, and halve the CGT exemption from 50% to 25%.
Let’s see what this means, using, a basic example. If you bought an investment property for $300,000 and sold it more than 12 months later for $700,000 you would have made a capital gain of $400,000. Under the current government you would be able to apply the 50% CGT exemption, meaning that your CGT liability would be assessed at $200,000 (50% CGT exemption) in the year of sale. Under the Labor plan, your CGT liability would be assessed at $300,000 (25% CGT exemption).
To be clear, Labor’s proposed changes to NG and CGT changes would not apply to property in your existing portfolio, as these would rightly be grandfathered. The challenges would be that when you went to sell your property into a market where negative gearing no longer exists:
- would the demand be as strong for established properties (as opposed to new builds); and
- would the price of your properties you currently hold be negatively affected after the negative gearing tax concessions have been eliminated?
As with many policy issues, a middle ground between the two parties may prove to be best – both politically and economically. For example, retaining negative gearing and CGT exemptions, but limiting the benefit to the number of properties (or the value of the portfolio) you can claim it on, may be a more acceptable position.
> Personal Income Tax Relief
Elections can be won or lost on short-term economic gains for individuals.
Both sides of politics are acutely aware that low wages growth, high personal indebtedness and higher costs of living are causing many Australians to feel the pinch.
The government’s May budget has highlighted its plans for $140 billion of personal income tax cuts over 10 years. The plan has three parts.
- Step 1– To provide tax relief for low and middle-income earners worth up to $530 p.a to help with cost of living pressures. Under the plan, low-income earners with wages of up to $37,000 a year will have their tax offset by an extra $200 on top of established offsets.
Those earning between $37,001 and $47,999 will receive a tapered reduction up to a maximum of $530 a year, while those earning between $48,000 and $90,000 will receive the maximum offset of $530 p.a.
Of course, not to be outdone, Labor has ‘one-upped’ the government plan with its introduction of the carefully worded ‘Working Australians Tax Refund’, at a cost of $5.8 billion over the next four years. In essence, it would support the government’s tax plan providing up to $530 p.a in tax offsets in 2018-19 and commence an additional refund of up to $398 p.a from the 2019-20 tax year with over four million Australians getting the full $928 benefit per year.
- Step 2– The burden on individual taxpayers to generate government revenues has increased from 45% of all revenue in 2000-01 to 51% in 2016-17 – in part due to bracket creep. Scott Morrison’s budget has proposed a shift in the tax system, where the threshold for tipping into the 32.5% tax bracket will be lifted from $37,000 to $41,000 and the threshold for the 37% bracket will go from $90,000 to $120,00 starting from July 2022.
- Step 3– To simplify and flatten the tax system by removing the 37% bracket completely on July 1st, 2024. This would create one giant middle tax bracket of 32.5% for income-earners on salaries of between $41,000 and $200,000.
Again, politics and economics can easily be blurred, with Bill Shorten in his budget reply speech asking ‘How on earth can it be fair for a nurse on $40,000 to pay the same tax rate as a doctor on $200,000? For a cleaner to pay the same tax rate as a CEO?’
In reality, and only by 2024-25 under the government proposal, a person on $41,000 would pay $4,767 in tax (or 11.6% of earnings) versus a person on $200,000 paying $60,007 (or 30% of earnings). Or to put it another way, the person on $200,000 p.a. earns nearly 5 times as much as the person on $41,000 p.a. but pays 12.6 times more tax.
Personally, as a professional property investor I will not be placing much weight on the personal tax cuts of either party. The up to $530 p.a. under the government, or the up to $930 p.a. under the opposition, are mathematically insignificant compared to the growth potential of a healthy property portfolio on an annual basis, or even compared to the 25% reduction in CGT exemption proposed by Labor.
> Economic Growth
You will naturally choose to elect the party that you believe best represents your economic and social interests. A few other key election issues will be;
- Corporate Tax Cuts:Labor will argue that large companies do not deserve to have tax cuts to make them more competitive internationally and the Coalition will argue that tax cuts will flow into more jobs and investment.
- Government Spending:The government will argue for a cap on government spending, while also announcing a raft of transport Infrastructure initiatives, and Labor will run on a platform of higher spending on hospitals and schools.
Ultimately, all boats rise on a rising tide and, therefore, considered thought needs to be given to which party is best placed to steer Australia’s economic growth forward. In other words, in order for your property portfolio to continue to build value over time, it is critical that the government of the day continues to provide policies that promote and foster economic prosperity, jobs growth and wages growth.
Luke Harris and Matthew Bateman are co-founders of The Property Mentors, a Melbourne-based business comprising an elite team of property professionals who educate, motivate and facilitate clients from all around Australia. Their new book, Let’s Get Real(Major Street Publishing $29.95) is now available. For more information visit www.letsgetrealbook.com.au/giveaway